S Corporations

S-corp distributions are not automatically tax-free just because the business made money. Whether a distribution is taxable depends on your stock basis - not your bank balance. When distributions exceed your stock basis, the excess is treated as capital gain under IRC Section 1368, and that gain is real and reportable. This catches a lot of first-year S-corp owners off guard, and understanding how basis works is the key to avoiding the surprise next time.

An accountable plan is an IRS-compliant reimbursement arrangement that allows a business to reimburse employees and owner-employees for business expenses without those reimbursements being treated as taxable wages. When structured correctly under IRC Section 62(c) and the Treasury regulations under Section 1.62-2, reimbursements flow through the business as deductible expenses and never appear on the employee's W-2. When structured incorrectly - or not at all - the same payments become wages subject to income tax, payroll tax, and reporting requirements on both sides of the transaction. For S-corporation shareholders especially, the difference between having and not having an accountable plan can mean thousands of dollars in unnecessary payroll tax annually.